Question

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,048,000 and will last for six years. Variable costs are 40 percent of sales, and fixed costs are $195,000 per year. Machine B costs $5,229,000 and will last for nine years. Variable costs for this machine are 35 percent of sales and fixed costs are $130,000 per year. The sales for each machine will be $10.1 million per year. The required return is 11 percent, and the tax rate is 30 percent. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis. Calculate the NPV and EAC for each machine.

Answer 1

Answer

Evaluation of NPV :

Year Net Cash Flow -30,48,000 5,08,000 5,08,000 5,08,000 5,08,000 5,08,000 Machine A Cost of Capital Discounting Factor Value 11% 1.00 $ 11% 0.90 $ 11% 0.81 $ 11% 0.73 $ 11% 0.66 $ 11% 0.59 $ Present Value of Cash Flow Cumulative Cash Flows -30,48,000 $ -30,48,000 4,57,658 $ -25,40,000 4,12,304 -20,32,000 3,71,445 $ -15,24,000 3,34,635 $ -10,16,000 3,01,473 $ -5,08,000 Net Present Value Net Payback Period (in years) 11,70,484.32 6.00

Year Net Cash Flow -52,29,000 5,81,000 5,81,000 5,81,000 5,81,000 5,81,000 5,81,000 5,81,000 5,81,000 5,81,000 Machine B Cost of Capital Discounting Factor Value 11% 1.00 $ 11% 0.90 $ 11% 0.81 $ 11% 0.73 $ 11% 0.66 $ 11% 0.59 $ 11% 0.53 $ 11% 0.48 $ 11% 0.43 $ 11% 0.39 $ Present Value of Cash Flow Cumulative Cash Flows -52,29,000 $ -52,29,000 5,23,423 $ -46,48,000 4,71,553 $ -40,67,000 4,24,822 $ -34,86,000 3,82,723 $ -29,05,000 3,44,795 $ -23,24,000 3,10,626 $ 5,81,000 2,79,844 $ 11,62,000 2,52,111 $ 17,43,000 2,27,127 $ 23,24,000 $ Net Present Value Net Payback Period (in years) 17,97,226.37 5.00

Evaluation of EAC:

Particulars	Machine A	Machine B
Sales	1010000	1010000
Less: Variable Cost	404000	353500
Contribution	606000	656500
Less: Fixed Cost	195000	130000
Profit	411000	526500
EAC	599000	483500